Quick Facts

Eritrea’s economic freedom score is 38.9, making its economy one of the most “repressed” in the 2015 Index. Its overall score is 0.4 point better than last year, with improvements in labor freedom and the control of government spending offset by declines in freedom from corruption and business freedom. Although Eritrea has recorded its highest economic freedom score ever in the 2015 Index, it is ranked 45th out of the 46 countries in the Sub-Saharan Africa region and remains the world’s fifth least free economy.

Located on the Red Sea and with a burgeoning mining sector, Eritrea has experienced a half-decade of strong GDP growth that, along with more prudent spending and a slightly more stable monetary outlook, has led to a modest increase in economic freedom. However, improvements have occurred in only three of the 10 factors.

Over the past five years, scores have declined in the areas of corruption, taxation, and labor policy, further burdening an already weak institutional framework. An oppressive central government controls investment and the financial sector and distorts prices. Corruption is endemic. The judiciary is highly politicized and fails to check government expropriations of private property.

Background

Isaias Afwerki has ruled this one-party state since 1993. According to a U.N. report in 2014, 4,000 Eritreans flee every month because of government repression. Eritrea is subject to U.N. military and economic sanctions for supporting armed opposition groups in Horn of Africa countries. Border conflicts persist between Ethiopia and Eritrea. Although Eritrea is one of Africa’s faster-growing countries in percentage terms, growth in absolute terms is relatively meager. Copper and gold are important exports, but military spending drains resources from development of public infrastructure. An estimated 70 percent of Eritreans cannot meet basic food needs, and the government declines international food aid. Roughly three-quarters of Eritreans depend on small-scale agriculture and fishing, and up to two-thirds reportedly rely on government assistance.

The autocratic regime of the president and his small circle of senior advisers and military commanders is widely considered to be one of the world’s most repressive. Corruption is a major problem. The politicized judiciary, understaffed and unprofessional, has never ruled against the government. Protection of property rights is poor. The state has often expropriated private property without notice, explanation, or compensation.

The top individual and corporate income tax rates are 30 percent. Other taxes include a controversial 2 percent levy on the Eritrean diaspora. The overall tax burden equals 50 percent of the domestic economy. Government expenditures equal 30.7 percent of domestic income, and public debt is larger than the size of the economy at over 125 percent of gross domestic product.

Cumbersome procedures and high compliance costs continue to be impediments to business formation. In the absence of private-sector employment opportunities, an organized labor market has not emerged. Existing labor regulations are outmoded and create challenging barriers to hiring. Monetary stability remains weak overall. Subsidies and price controls have been a core feature of the country’s command economy.

Eritrea’s average tariff rate was 5.4 percent as of 2006. Importing goods can be a time-consuming process. Eritrea’s economy is dominated by the state and provides a difficult environment for foreign investors. The financial system remains very underdeveloped. All banks are majority-owned by the state, and private-sector involvement in the system remains limited.